RBI announces new Rupee route for foreign trade

Post By : Rachayita Sidharth
Post Date : July 12, 2022
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On Monday, the Reserve Bank of India (RBI) announced a new rupee route – a settlement system – for foreign trade, which could help India promote its exports and facilitate trade with countries under sanction. Sources say the new settlement system is aimed at facilitating and expediting transactions with sanctions-hit Russia.

Under the existing provisions of the Foreign Exchange Management Act (FEMA), all final settlements must be in free foreign exchange (USD), except for Nepal and Bhutan. With the new system, the final settlement to all countries can be in the Indian rupee, if approved by the RBI.

“Russian banks will have to open Vostro accounts in India, and whenever exports or imports take place, that account will be debited or credited, depending on the transaction,” said a senior private sector banker, adding that this will only be possible for Russian banks that are not part of the OFAC sanctions list.

The new system will allow payments to be made and received by Indian traders in INR via the Vostro account. According to experts, this will ease the pressure on India’s forex reserves and may stabilise INR, which had recently it record lows against the USD.

It is a good move as far as India is concerned. Since we import more than we export, we will save foreign currency under the new arrangement. For instance, under normal circumstances, we would have had to pay Russia in dollars for oil purchases, which can now be done through the rupee-rouble route.”

Madan Sabnavis, Chief Economist, Bank of Baroda

The circular issued by RBI said that the Authorised Dealer (AD) Banks will be required to obtain prior approval from RBI’s Forex Dept. before putting the new mechanism in place. AD Banks are commercial banks, state co-operative banks and urban co-operative banks that. are authorised by the RBI under FEMA to deal in foreign exchange transactions.

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